Grounded Planes To Hurt IndiGo’s Market Share But Not Earnings
Technical problems and grounded planes could exacerbate IndiGo’s market share loss, said analysts tracking India’s largest airline company.
Interglobe Aviation Ltd., the parent company of IndiGo, has cancelled 935 flights, while Go Airlines (India) Ltd., the parent company of India’s fifth largest airline company GoAir, has cancelled 138 flights for the second half of March, according to the data provided by the companies.
IndiGo, which operates more than 1,000 flights daily, has cancelled six percent of its daily flights, while GoAir, which operates more than 200 flights daily, has suspended seven percent of its daily flights.
India’s aviation regulator, the Directorate General of Civil Aviation, grounded A320neo aircraft operated by these two airlines due to instances of technical glitches in their Pratt & Whitney engines. The decision came after IndiGo’s A320neo aircraft suffered engine failure mid-air and was forced to make an emergency landing.
Grounded planes and subsequent delays in aircraft addition due to engine trouble is likely to restrict IndiGo’s passenger growth. The airline grew slower than the industry during the second half of 2017, recovering to industry-level growth only in January.
IndiGo’s market share fell 290 basis points to 39.7 percent from its peak of 42.6 percent in October 2016 as smaller operators including GoAir, Vistara (run by Tata SIA Airlines Ltd.), AirAsia (India) Pvt. gained customers.
To maintain operations and stem loss in market share analysts expect IndiGo to acquire more aircraft on lease from the secondary market as against the company’s policy of buying aircraft. Any financial impact of this and the grounding is likely to be borne by engine maker Pratt & Whitney as was the case the last time as well.
In the interim, IndiGo’s dependence on secondary market leases is expected to continue which could result in slightly higher ownership costs, which will be compensated by the suppliers.SBICAP Securities
IndiGo suffered similar engine trouble and flight disruptions in the September and December ended quarters, for which it had received credits from engine maker Pratt & Whitney, the company had stated in its earnings conference calls.
The engine maker expects to resolve the technical issues by June 2018. Any delays will further cap IndiGo’s growth and add to the market share loss, in the world’s fastest growing aviation market.
For now, IndiGo’s loss is likely to result in gains for Air India Ltd., Jet Airways Ltd. and a few smaller operators which are running at lower capacity utilisation. SpiceJet Ltd., the closest competitor of IndiGo is less likely to benefit as it is already running at high capacity utilisation.